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Don't Miss These Early Warning Signs on Apple

Blowout earnings are blinding some investors to early warning signs.

Apple's (Nasdaq: AAPL) earnings report vastly exceeded even the most optimistic expectations. But the stock is trading at a P/E ratio of less than 16, suggesting that many investors don't believe a company with $100 billion in revenue can continue defying the law of large numbers. I think they're right … and the early warning signs are there for those who look.

The quarter's so bright, you gotta wear shadesApple's revenue rose 82% year over year last quarter. EPS rose by an even more impressive 122%. How does a company with more than $100 billion in annual revenue deliver such stunning growth? It's working the "4Ps" of marketing, and working them quite well:

Promotion: Apple's compelling ads focus on what can be done with its products, rather than specs and prices, and are often humorous. And although normally retail locations fall under the fourth "P" of marketing, Place, Apple's stores can just as easily fall under Promotion. Apple broke new ground in retailing, and its stores are so successful that J.C. Penney recently hired Apple's retail chief as its new CEO.

Place: Apple is in the right market segments. And it's in many -- but not all -- of the right markets.

It's that last part that explains much of Apple's current ability to defy the law of large numbers. In many places, it's hard or impossible to buy Apple products. That's evident in Apple's growth strategy, outlined as follows in its most recent 10K:

Geographic expansion. Many of its most popular products have limited availability. For example, in September 2010 the iPad was available in only 26 countries. In contrast, the iPhone was available in 89 countries.

More mobile carriers. For example, expanding iPhone availability in France from one to three carriers helped grow market share from 3% to 11% there over two quarters. In China, Apple already does business with China Unicom and is widely expected to land China Telecom and mega-operator China Mobile with the iPhone 5.

More Apple Store retail locations. Retail sales increased 47% in fiscal 2010, driven by an average increase in per-store revenue of 30% and by the addition of 44 new stores. Still, this segment represented only 15% of Apple’s fiscal 2010 sales. As of September 2010, it had 317 retail stores, including 233 in the United States and 84 in 10 other countries.

Growing its investment in marketing, sales, and advertising programs to increase product and brand awareness, sales through resellers, and sales in the Enterprise and Small-Medium Business segments.

A richer mix of offerings.

Growing painsWho can forget AntennaGate? Apple insisted that antenna issues on the iPhone 4 were common among cell phones, but Consumer Reports disagreed. After testing the original AT&T(NYSE: T) iPhone 4, the Verizon(NYSE: VZ) version released earlier this year, and several other smartphones offered by the same carriers, Consumer Reports concluded, "the iPhone was the only phone affected by placing a finger around the outer band of the phone." What's more, Apple was advertising heavily to hire antenna engineers after the debacle, suggesting that it saw a need to strengthen its technical capabilities in this arena.

The impending end of MobileMe is further evidence that Apple's technology doesn't always "just work," as the company claims. I write from personal experience on this topic. MobileMe does fine syncing email and bookmarks among my devices, but it's a disaster when it comes to syncing contacts, calendars, notes, and documents. Hours and hours spent with Apple tech support and two free device replacements have not resolved these issues. Is it me? I synced multiple PCs and a Palm with Intellisync for many years with nary a hitch, so I'd like to think it isn't. Web forums confirm that I'm not alone.

Apple introduced MobileMe more than three years ago but still hasn't gotten it right. iCloud should have been the next generation of MobileMe. Instead, Apple is "firing" its MobileMe customers next year. iCloud won't offer several MobileMe features. That suggests that Apple realizes MobileMe is so troubled that it's better off just starting over.

This isn't only technology where Apple has faltered. The company has a well-deserved reputation for marketing savvy and great customer experiences. That makes its recently botched product-transition announcement on Final Cut Pro noteworthy. It's a sign that the company's culture and standards are slipping.

Foolish takeawayIt typically takes a while for problems to come back and haunt a computer company. For example, I heard complaints about the deterioration of Dell's (Nasdaq: DELL) tech support and product quality for two to three years before the company's financials began to deteriorate in 2005. And after swearing by Hewlett-Packard(NYSE: HPQ) printers for years, I bought one in early 2010 with problems that have never been resolved. More than a year after that purchase, HP's challenges became evident in its financials.

Apple's stock probably has several more good years ahead of it. But there are signs the company has started to lose its way under the weight of rapid growth. Investors would be well served to monitor these warnings. To help you keep an eye on your investments, The Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding these companies to your Watchlist now: